1:00pm(NZT)Australia
The Australian dollar has seen plenty of action this week on the back of conflicting data releases and the Reserve Bank of Australia’s (RBA) rate statement. The RBA left rates unchanged after their meeting on Tuesday and released a statement that failed to give any clear guidance the future path of interest rates. This was a little bit of a disappointment to the market that had already moved to price in another rate cut before the end of the year. The AUD saw good gains on the back of the statement. These gains were helped by a better than forecast current account result that caused many forecasters to revise up their predictions for first quarter GDP. In the end that proved to be the right move as Wednesday’s release of GDP came in at reasonably strong +0.9%. The Australian dollar again saw gains on the back of that release. The problem is that this growth may not carry over into the second quarter. This point was highlighted by yesterday’s retail sales data for April that came in flat (0.0%) versus +0.3% expected. As disappointing as that was, it certainly wasn’t as bad as the trade balance figure which also hit the wires yesterday. The trade balance for April came in at -3.89bln versus -2.1bln expected. That’s the largest trade deficit on record. The large deficit was driven by 6% fall in exports and a 4% increase in imports. The Australian dollar quickly fell undoing much of the gains seen earlier in the week. Next week could prove to be another volatile one with business confidence, consumer sentiment, inflation expectations and employment change all set for release.

New Zealand
It has been a quiet week for data from New Zealand with Fonterra’s dairy auction drawing the most attention. The 4.3% fall in the overall price index was somewhat unexpected and definitely disappointing for the dairy sector. It also marks the sixth consecutive fall and dashed hopes that prices may be starting to stabilize. It’s looking very much like the dairy sector will have to brace for another tough season in 2015/16. The focus now turns to next week’s Reserve Bank of New Zealand (RBNZ) monetary policy statement. The market has roughly priced in a 50% chance of an interest rate cut from the central bank, and as such we should see some volatility around the announcement. The RBNZ last hiked interest rates only eleven months ago, so it would be something of a dramatic turn around and cut rates now. It does seem likely the next interest rate move will be a cut, but later in the year seems a more reasonable option. The RBNZ will have more data under its belt by then and better feeling for just how the global economy is progressing.

United States
The past week has seen a mixed bag of data from the United States that’s failed to support further gains in the USD, at least for the time being. The big dollar actually saw some sharp losses in the first half of the week as a big move in the EURUSD translated into a much broader USD decline. Data that’s come in below expectation this week includes, personal spending, the core PCE price index, factory orders and non-manufacturing PMI. While on the positive side we have seen better than forecast results for personal income, manufacturing PMI, construction spending, vehicle sales and the trade balance. Without a shadow of a doubt the most important release is still to come in the form of tonight’s non-farm payrolls report. If we continue to see strength in employment it will go a long way to cement expectations for an interest rate hike by the Fed in September. Some forecasters even suggest a June hike is still a possibility if employment growth is strong, but that does seem unlikely at this stage. Next week the economic calendar looks a little lighter, although we do get retail sales, producer prices and consumer sentiment data to digest.

United Kingdom
The UK Pound has struggled to kick on with gains this week, held back by a couple of disappointing PMI readings. Construction PMI actually improved, but both the manufacturing and service sector PMI results came in below expectation. The service sector reading was particularly disappointing, not only because it represents two thirds of the economy, but because it showed the biggest decline in for years. The index fell from 59.5 in April to 56.5 in May. That’s also the lowest reading in two years. In the first quarter of this year the UK economy grew by just 0.3% and this data suggests the second quarter may not be much better. The only positive you can take away from the data is that the sector is still well in ‘expansionary’ territory. Any PMI reading over 50 denotes expansion in the sector, while below 50 signals contraction. Still that’s not much consolation in the face of such a sharp decline. The Bank of England (BOE) met last night and as expected left interest rates unchanged. With PMI data like they’ve had this week, a rate hike this year is looking much less likely. Next week we have the trade balance, inflation report hearings, manufacturing production, and the NIESR’s GDP estimate to digest.

Europe
The past week has seen a wild ride for the Euro and for European interest rate markets. Generally supportive data out of Europe has been encouraging for the outlook going forward and the European Central Bank (ECB) rate meeting came and went with no real surprises. What has been a surprise is the carnage is German bunds (long term interest rates). German 10 year yields, that traded as low as 0.05% in mid-April, have had a massive move higher, and last night briefly traded over 1.0%. This move has happened in the face of the ECB quantitative easing programme that should, in theory, push yields lower. The move has spread into global interest rate markets with yields as far away as Japan also pushed higher. In the press conference following the ECB rate decision President Draghi said market should get used to volatility and investors would have to lean to deal with it. The move higher in yield has been very supportive for the Euro that made big gains throughout most of this week. The currencies move higher was also supported by hopes that a Greek deal was close, but last night some real cracks started to appear. Greece said they are going to ‘delay’ a EUR300m payment to the IMF that is due today. This will be the first time since world war two a developed country has ever missed a payment to the IMF. When this news broke the Euro quickly turned around and gave up significant ground. A deal may still be reached, but both sides seem intent on pushing the Eurozone to the brink of a catastrophe that nobody wants. The volatility is far from over. Next week’s economic calendar is much lighter with mostly second tier data set for release.

Japan
Data from Japan this week has been reasonably positive. Capital spending came in much higher than forecast at 7.3% and inflation adjusted real wages are now positive for the first time in two years. Average cash earnings data jumped 0.9% in April. The market was expecting an increase of just 0.3%. Officials had been suggesting we will see positive wage developments and data like that will certainly be welcome. The government has been pushing companies to boost wages in an effort to spur consumer spending and help create a ‘virtuous cycle’ of growth. It starting to look like their efforts are paying off. Next week from Japan we have the final reading of GDP, consumer sentiment, core machinery orders, and tertiary industry activity data.

Canada
There have been only two releases of note from Canada so far this week. The trade balance did narrow from its previous record deficit to come in at -3.0bln. That was however, worse than market expectations which were for a result of -2.1bln. Most of the deficit can be accounted for by falling energy export prices. Somewhat more positively, the Ivey PMI (purchasing managers index) rose at its fastest pace in 19 months. The index jumped to 62.3 from 58.2 prior. The market was expecting a small fall to 55.1. Although the index can be volatile this reading is very positive and it does back up the central bank's view that the poor first quarter is well behind them. Tonight we have the key release of employment change. The market is expecting a gain in employment of 10.2k. The prior reading was -19.7k. Next week the focus will turn to building permits, the new house price index and a speech from Governor Poloz.

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